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final2006answers - Part I Multiple Choice 1 B 2 C 3 D 4 A 5...

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Part I . Multiple Choice 1. B 2. C 3. D 4. A 5. C 6. A 7. B 8. B 9. D 10. B Part II . Please answer 5 of the following 6 questions. 1. ( 10 points ) Show that a large economy may improve its welfare by introducing a tariff. Provide a brief explanation and a diagram. Assume that Home country has world monopoly in good Y. If H exports Y, fall in production and exports of Y may lead to increase in the world price of Y (Py*) =>H’s terms of trade will improve. H sells less Y, but charges higher price =>increase in export revenues. Effect will depend on the magnitude of the terms of trade effect. Old equilibrium: Q*, C* New equilibrium: Qt, Ct. Pt – distorted domestic price P*t – new world price Ut>U* imposition of tariff may improve welfare of a large country. X Y P τ P * U * Q * C * Q τ P * U τ C τ
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2 2. ( 10 points ) Assume H is a poor country, and F is a rich country. Also assume that the two countries have identical non-homothetic preferences. In particular, share of good X in “consumption basket” grows with population’s income. Explain and show on a diagram that F and H can both gain from trade with each other. Y X O A H’s PPF F’s PPF C B P P A h A f Q h Q f C f C h F’ s national income is higher than H ’s. Minimum consumption requirement for Y means that share of expenditures on Y
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